Bloomberg Tax
Oct. 11, 2022, 8:45 AM

Crypto’s Evolution as an Asset Class Needs Better Accounting

Aaron Jacob
Aaron Jacob

Last year, bitcoin passed a key milestone toward institutional acceptance as an array of publicly traded companies added it to their corporate treasuries. Alongside traditional financial instruments, and despite a significant price drawdown, companies such as Tesla, Block (formerly Square), and Coinbase still hold over $100 million worth of bitcoin today.

But after last year’s initial hype, the corporate balance sheet clamor for bitcoin has slowed to a crawl, likely due in part to complex accounting rules. For observers and investors in public companies holding bitcoin, disclosure rules are also vague and deter transparency. Tesla recently left a mystery in its wake as it sold 75% of its initial $1.5 billion bitcoin stake, leaving questions about its initial cost basis and disposition unanswered. To be fair, such transparency is by no means required under current accounting rules.

According to today’s accounting standards, bitcoin, which is considered an “intangible asset,” is disclosed in a markedly different way than typical investments such as cash, stocks, or bonds. Publicly traded firms are required to incur impairment charges against their bitcoin purchases whenever prices dip below the initial cost basis. In other words, and especially for volatile assets like bitcoin and other cryptocurrencies, impairment ends up harming the bottom line of public earnings reports and requires companies to hold these assets on their balance sheets at their lowest valuation since the point of purchase.

It also can be a significant logistical challenge for accounting teams to accurately track intraday price movements to properly record impairments. As crypto winter has set in, the bitcoin-heavy balance sheet for the publicly traded Microstrategy has weighed especially heavily, as it has had to report hundreds of millions of dollars’ worth of losses via impairment charges over recent quarters.

While corporates have slowed or reversed their bitcoin balance sheet acquisitions, institutional adoption is continuing in other meaningful ways. Blackrock recently teamed up with Coinbase to enable crypto investment for institutional investors, and Fidelity plans to enable 401(k) investment in bitcoin later this year. If the digital asset class is truly ready for maturity, however, it’s past time for better accounting rules and regulatory transparency.

Transparency enforced by official institutional guidance can help prevent meltdowns and undue harm to investors. In the wake of high-profile crypto bankruptcies such as Celsius and Voyager, these tenets are as critical as ever. Key institutions such as the Financial Accounting Standards Board and the Securities and Exchange Commission are poised to fill the digital asset accounting gap for public and private firms.

Last March, the SEC issued Staff Accounting Bulletin 121, which offered SEC staff interpretations on crypto accounting safeguards. In this guidance, the SEC staff expressed views related to “entities that have obligations to safeguard crypto-assets held for their platform users.” The guidance requires that these entities recognize a safeguarding asset and liability and notes that crypto-assets should be recorded as a liability and corresponding asset on their balance sheet at fair value.” The staff interpretation recommends that companies gross up their balance sheet when they are responsible for safeguarding customer assets.

But soon after SAB 121 was issued, SEC Commissioner Hester Peirce raised several dissenting concerns. First, she wondered “why now?” as bankruptcies and thefts from cryptocurrency custodians have been occurring for years. Second, she noted, “the SAB does not acknowledge the Commission’s own role in creating the legal and regulatory risks that justify this accounting treatment. The Commission has refused, despite many pleas over many years, to provide regulatory guidance about how our rules apply to crypto-assets, so some of the responsibility for the lack of legal and regulatory clarity lies at our doorstep.”

Further, Peirce seeks coordination between the SEC and the FASB in setting official accounting standards. In that regard, and after requests by companies and investors frustrated by impairment charges and lack of transparency, the FASB may soon share its own official guidance. Ideally, the new FASB rules will lead to clearer accounting outcomes that are more aligned with economic realities—for example, holding digital assets on the balance sheet at fair value rather than impaired cost—along with better disclosure and transparency rules for crypto-asset holdings by corporations.

Given official accounting standards and guidance by institutions such as the FASB, crypto should evolve to meet the same standards as traditional asset classes. Similar to what traditional asset classes experienced in 2008, cryptocurrency recently experienced its own high-profile Lehman-like bankruptcies. In the wake of the 2008 financial crisis, a speech by SEC Commissioner Kathleen Casey homed in on the need for accounting standards to promote transparency.

After the traditional mark-to-market accounting standard came under duress as asset prices dropped and liquidity receded, the FASB and other institutions swiftly coordinated to offer definitive guidance for fair value accounting in illiquid markets, in addition to improved disclosure transparency. Crypto needs similar standards—and fast. The FASB is coordinating with other relevant agencies to offer formal guidance in the foreseeable future, and that will be critical for cryptocurrency’s maturation as a new asset class.

After a chaotic crypto winter, regulatory clarity, transparency, and better accounting will let spring finally emerge again.

This article does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Aaron Jacob leads TaxBit’s efforts in building and scaling TaxBit’s ERP solution—the Core Accounting Suite—which streamlines and automates the financial reporting needs that businesses and management teams face regarding digital assets.

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